USD/JPY bears have moved in ahead of the big day, the Fed

USD/JPY was on the back foot on Friday and was trading at a low of 129.31 as the pair corrects in a W-formation. For the open, the pair is steady ahead of what will be a busy week for the pair. 

With the help of a dovish Bank of Japan, the pair traded at a new high at 131.25 last week from which the bulls threw in the towel taking profits into month-end. However, by sticking with ultra-loose policy, the BoJ cannot expect anything except further yen weakness in the face of a hawkish Federal Reserve. 

In comments following the announcements and a commitment to buy an unlimited amount of government bonds in order to keep 10-year yields at about 0%, BoJ Governor Haruhiko Kuroda emphasized that the current rise in inflation was being driven mainly by higher costs. This means that the BoJ wishes to abstain from tightening policy for now.

In stark contrast, the Fed is expected to raise rates by 50bp at its 3-4 May meeting and simultaneously announce quantitative tightening. This will result in an asset reduction of around USD95bn per month. Back-to-back 50bp hikes in June and July are also anticipated.

Consequently,  the US dollar continues to firm along with the higher yields. Analysts say that this ''can be chalked up to the dollar smile theory that suggests the dollar will gain during periods of strong U.S. data and rising U.S. rates as well as bouts of risk-off sentiment.'' 

''Furthermore, we must stress that negative developments in the rest of the world (Russian gas supplies, dovish BOJ, etc.) are playing a big part in the dollar’s strength by highlighting relative fundamentals that favor the greenback.''